Bank of America Earnings: Net Interest Income Outperforms, but Expenses Creep Higher

Bank of America Stock at a Glance

• Fair Value Estimate: $35.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Bank of America Earnings Update

Bank of America BAC reported second-quarter earnings per share of $0.88, beating the FactSet consensus of $0.84 and our own estimate of $0.73. The result was primarily attributable to higher net interest income, or NII, and trading results. The bank gave its first full-year guidance for NII: a little above $57 billion on a fully taxable equivalent basis, which is a bit better than we forecast.

This rounded out a quarter in which all of the “Big Four” U.S. banks raised their NII expectations. Overall, with period-end deposits down 3% year to date (tracking our expectations) and NII expectations stabilizing or even improving, our confidence is improving in the overall profitability outlook for the largest banks. The next big catalyst will be updated regulatory requirements, which are likely to be released in a matter of weeks or months.

While the NII story was positive, the bank’s expenses seem to be creeping higher, which we’ve highlighted in the past and expected this year. Soft expense targets of $15.8 billion for the third quarter and $15.6 billion for the fourth quarter imply a full-year expense of $63.7 billion, compared with management’s previous target of $62.5 billion. We were expecting this to some degree, with our forecast at $63.2 billion, but we anticipate raising it a bit after this quarter’s results. The expectation for a $1.9 billion FDIC special assessment was also higher than our estimate, which was closer to $1 billion, although this is a one-time expense and not material to our fair value estimate.

As we incorporate a slightly higher NII outlook, slightly higher expenses, and the possibility of higher regulatory capital requirements, we may lower our $35 fair value estimate for the bank’s stock. However, we don’t expect the decrease to be more than a dollar or two, leaving a slight valuation gap relative to peer JPMorgan Chase JPM (although the gap is closing after this earnings report).